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A Reverse Mortgage: Is It Right for You?

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Reverse Mortgage

For many older Americans, the dollar value of the equity in their homes rivals or even supersedes investment and retirement savings.  Traditionally, for those wishing to tap into the equity in their homes, there were only two options:  sell it or borrow against its value.  Today, for senior citizens (62 and older), there is a third option:  secure a reverse mortgage.  And, for many seniors seeking to ease their ongoing financial burden, make home improvements, or improve their lifestyles, a reverse mortgage can be the right option.

 

Reverse mortgages have actually been in existence for almost fifty years, with the first reverse mortgage written in 1961.  But, it was not until the late 80’s that this unique financial product began to gain wide acceptance with the approval and subsequent signing into law of the Federal Housing Authority Insurance Program.  Under the provisions of the law, the U.S. Department of Housing and Urban Development (HUD), with the guidance of the American Association of Retired Persons (AARP), initiated a reverse mortgage pilot program.  The success of the initial program has blossomed into hundreds of thousands of seniors taking advantage of reverse mortgage products.

 

To determine if a reverse mortgage is right for you, you must consider the available programs as well as their benefits and costs.  In doing so, the following questions and answers may be helpful to you:

 

What is a reverse mortgage?

 

A reverse mortgage is a loan against your home that you do not have to repay for as long as you own and live in your home.  This type of loan product permits you to transform your home’s equity into cash to use as you see fit.

 

Who is eligible for a reverse mortgage?

 

Reverse mortgages are available to homeowners aged 62 and above in all 50 states, the District of Columbia, and Puerto Rico.  You must actually live in your home, and it must be one of the following:  a single-family/1-unit dwelling, a single-family residence in a 2- to 4-unit dwelling, part of a planned unit development (PUD), a HUD-approved condominium, or an approved manufactured home.  Cooperatives and most manufactured and mobile homes are not eligible.

 

Your home must be at least 1 year old and meet HUD’s minimum property standards.  You can, of course, use some of the proceeds of your reverse mortgage to make repairs that may be required.

 

Additionally, you cannot be delinquent on any federal debt and must discuss your reverse mortgage with a counselor employed by a non-profit or public agency approved by HUD.

 

What are the types of reverse mortgages?

 

There are several types of reverse mortgage products, the primary three of which are FHA’s Home Equity Conversion Mortgage (HECM), Fannie Mae’s Home Keeper reverse mortgage, and proprietary reverse mortgages.  While the HECM is the most flexible and lowest cost program, they all use the value of the home, current interest rate, and age of the borrower(s) to determine the maximum amount that can be borrowed.  Fannie Mae Home Keeper’s cap is fixed in all locations, while HECM’s maximum loan amount depends upon the FHA’s mortgage limit for the county in which the home is situated.  Any caps on proprietary reverse mortgages are set by the lenders themselves.  Generally speaking, the greater the value of your home and larger the loan amount you require, the more likely that you will exceed HECM’s limits and need to consider Home Keeper or proprietary loan products.

 

Additionally, there are some state and local reverse mortgage programs, usually for one specific purpose.  Examples include Deferred Payment Loans (DPL’s) for repairing or improving your home or Property Tax Deferral (PTD) loans providing annual loan advances used only to pay property taxes.

 

The value of your home and loan amount you are seeking will be important factors in determining the type of reverse mortgage loan that will meet your needs.

 

What are the benefits of a reverse mortgage?

 

The primary benefit of a reverse mortgage is the ability to convert your home’s value into cash without the need to move after its sale or assume debt that increases your monthly expenses.  All of the programs, except for those in response to a specific purpose, permit you to select how you will access this cash.

 

The HECM is generally considered the most flexible program.  Those selecting the HECM product can choose to receive payments as follows:

 

Equal monthly payments as long as at least one borrower lives and continues to occupy the property.  This type of disbursement is termed “Tenure.”

 

Equal monthly payments for a fixed period of months, designed “Term.”

 

Unscheduled payments from a line of credit at times and amounts of the borrower’s choosing.  These payments can continue at borrower’s option until such “Credit Line” is exhausted.

 

Tenure payments combined with a Credit Line.

 

Term payments combined with a Credit Line.

 

Fannie Mae’s Home Keeper offers Tenure, Modified Tenure, and Credit Line options.  Borrow options from proprietary reverse mortgages vary from lender to lender.

 

How is the maximum loan amount determined?

 

The amount of cash available to you depends on your age, current interest rates, your home’s value, and any cap on the loan as discussed above.  The older you are, the more cash you can get.  If there is more than one owner, the age of the youngest owner is the one used to determine maximum loan amount.

 

The general rule of thumb to roughly estimate maximum loan amount is 1% of home value for every year of age of the youngest borrower.  That means that the youngest borrower is 70 years old and the home’s value is $300,000, the maximum cash available would be $210,000.  The actual cash available to the borrower, however, would be something less, since funds are set aside to pay loan costs and servicing fees.

 

How much does a reverse mortgage cost?

 

Like all other loans, reverse mortgages carry associated costs including application fees, mortgage insurance fees, origination fees, monthly service fees, closing costs, and interest.  These are all disclosed to the prospective borrower on the lender’s Good Faith Estimate.  Additionally, federal Truth-in-Lending regulations mandate that lenders disclose the Total Annual Loan Cost (TALC) for these loans.  The TALC combines all reverse mortgage costs into a single annual average rate.  This is very useful in comparing different types of reverse mortgage loans.

 

In general, for seniors who intend to remain in their homes for their foreseeable futures and wish to gain access to the equity in their homes without raising their monthly expenses, a reverse mortgage makes sense.  Beneficial for those who own their homes outright, reverse mortgages often provide even greater advantage to those seniors who have an existing first or second mortgage on their homes.  In these scenarios, a portion of the reverse mortgage loan proceeds will go toward paying off any existing loans on the home; thereby, reducing monthly expenses as well as freeing up cash from the home’s equity.

 

A Godsend for many seniors, a reverse mortgage can truly improve the lives of those availing themselves of its benefits.  For more information on reverse mortgages, feel free to contact us. 

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